legal effect of assignment

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Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Legal Implications of Contract Assignments

Contract assignments, whether by operation of law or voluntary agreement, trigger a complex array of legal implications that can substantially alter the rights, obligations, and liabilities of all parties involved. Novation and assignment differ in that novation extinguishes the original contract, while assignment transfers specific rights or obligations. The effects of assignment include the transfer of liabilities, changes to contractual relationships, and potential disputes. It is vital to examine the contract terms, applicable laws, and intent of the parties to determine the extent of the assignment. Understanding these complexities is imperative to navigate the intricate landscape of contract assignments, and further exploration reveals the nuanced details.

Table of Contents

Assignment by Operation of Law

In certain circumstances, a contract assignment can occur automatically, without the need for explicit consent or agreement, through a process known as assignment by operation of law. This type of assignment arises from the application of statutory provisions or court orders, rather than from the voluntary acts of the parties involved. For instance, in bankruptcy proceedings, the trustee in bankruptcy may assume control over the debtor's contracts, effectively assigning them to the trustee without the need for the debtor's consent. Similarly, statutory transfers, such as those arising from mergers and acquisitions, can also lead to the automatic assignment of contracts. In these scenarios, the assignment is deemed to have occurred by operation of law, and the parties are bound by the terms of the contract as if they had voluntarily agreed to the assignment. This type of assignment can have significant legal implications, and it is crucial for parties to understand the circumstances under which it can occur and the consequences that follow.

Novation Vs. Assignment

In the context of contract assignments, novation and assignment are two distinct concepts that are often confused. While both involve the transfer of contractual rights and obligations, they differ fundamentally in their nature and effects. This section will clarify the definitions of novation and assignment, highlighting their key differences and the implications for contractual obligations.

Definition of Novation

A novation, a tripartite agreement that substitutes a new party for one of the original parties to a contract, differs substantially from an assignment, which involves the transfer of a party's rights or obligations to a third party. Fundamentally, novation alters the contract's fundamental nature by replacing one of the original parties, whereas assignment only transfers specific rights or obligations. This distinction has significant implications for contract management and dispute resolution.

The benefits of novation include:

• Clarity and certainty : Novation provides a clear and explicit agreement among all parties, eliminating ambiguity and certifying that all parties comprehend their responsibilities and obligations.
• Fresh start : Novation offers a clean slate, allowing parties to start anew and move forward without the burden of past disputes or issues.
• Flexibility : Novation enables parties to adapt to changing circumstances and renegotiate terms to better suit their needs.
• Legal finality : Novation provides legal finality, establishing that all parties are bound by the new agreement and that previous obligations are discharged.

Assignment Key Differences

Assignment Key Differences (Novation Vs. Assignment)

While novation involves a tripartite agreement that substitutes a new party for one of the original parties, assignment merely transfers specific rights or obligations to a third party, highlighting fundamental differences in the contractual relationships and obligations of the parties involved. This distinction is vital, as it determines the contract priority and legal ramifications of each transaction. In assignment, the original contract remains intact, with the assignee stepping into the shoes of the assignor, whereas in novation, the original contract is extinguished, and a new contract is formed. This difference in contractual relationships affects the obligations and liabilities of the parties, with novation typically involving a more thorough transfer of rights and obligations. Understanding these key differences is imperative to navigate the complex landscape of contract assignments, facilitating that parties are aware of their rights and obligations under the contract.

Effect on Obligations

The contractual obligations of the parties involved undergo a significant transformation in both novation and assignment, albeit with distinct implications for the assignee, obligor, and assignor.

In novation, the original contract is effectively terminated, and a new contract is formed between the remaining parties. This leads to an obligation transfer, where the assignee assumes the original obligations, and the assignor is released from liability.

In contrast, assignment does not terminate the original contract. Instead, the assignee assumes the rights and obligations of the assignor, but the assignor remains liable for any breaches.

The key differences in the effect on obligations between novation and assignment can be summarized as follows:

• Novation releases the assignor from liability, while assignment does not.
• Novation involves a new contract, whereas assignment involves the transfer of rights and obligations under the original contract.
• In novation, the obligor's consent is typically required, whereas in assignment, consent may not be necessary.
• Novation leads to a complete liability shift, whereas assignment involves a shared liability between the assignor and assignee.

Note: The modified text replaces the words "result" and "results" with "leads" and "lead" respectively, to maintain contextual relevance.

Rights and Obligations Transfer

Contractual rights and obligations are inherently tied to the assignor and assignee, and their transfer requires careful consideration to avoid ambiguity and potential disputes. In the context of contract assignments, the transfer of rights and obligations is a critical aspect that merits attention.

A key concept in this regard is contractual privity, which refers to the direct relationship between the original contracting parties. When a contract is assigned, the question arises as to whether the assignee steps into the shoes of the assignor, assuming all the rights and obligations. A transferability analysis is necessary to determine the extent to which the assignee takes on the obligations and enjoys the rights of the assignor. This analysis involves examining the contract terms, applicable laws, and the intent of the parties involved. A thorough transferability analysis helps to clarify the rights and obligations of the assignee, facilitating a smooth handover and minimizing the risk of disputes. By carefully evaluating the transfer of rights and obligations, parties can facilitate a seamless succession and maintain the integrity of the original contract.

Consent and Notification Rules

Vital consent and timely notification are crucial prerequisites for a valid contract assignment, as they safeguard the interests of all parties involved and prevent potential disputes. The consent requirement ensures that the parties are aware of and agree to the assignment, while notification rules guarantee that all parties are informed of the changes.

The consent and notification rules can be categorized into the following:

• Silent Consent : Implied consent, where the obligor's (party owing the obligation) silence or inaction is deemed as consent to the assignment.
• Explicit Waivers : Written waivers, where the obligor explicitly agrees to the assignment, releasing the assignor from their obligations.
• Contractual Requirements : Specific provisions in the original contract that outline the consent and notification procedures for assignment.
• Statutory Requirements : Laws and regulations that govern the consent and notification rules for contract assignments in a particular jurisdiction.

Impact on Contractual Relationships

When a contract is assigned, the contractual relationships between the original parties and the assignee undergo significant changes. The obligations of the parties shift, as the assignee assumes the rights and duties of the assignor. This alteration in party obligations can have far-reaching consequences, affecting the performance and enforcement of the contract.

Party Obligations Shift

Upon assignment, the obligations of the original parties to the contract are transferred to the assignee, effectively altering the dynamics of the contractual relationship. This shift in obligations can have significant implications for the parties involved, as it redistributes the contract risks and performance burden.

The assignee assumes the responsibilities and liabilities of the original party, including any outstanding obligations or debts. This can lead to:

• Increased exposure to contract risks, such as non-performance or breach of contract
• A heightened performance burden, as the assignee must fulfill the original party's obligations
• Changes to the original party's rights and duties under the contract
• Potential disputes or conflicts arising from the transfer of obligations

The shift in party obligations can also impact the contractual relationship, potentially leading to changes in the dynamics of trust, communication, and cooperation between the parties. It is essential for parties to carefully consider the implications of assignment and ensure that the terms of the contract are clear and comprehensive to avoid potential disputes or conflicts.

Rights and Duties

The assignment of a contract can substantially alter the allocation of rights and duties among the parties, potentially leading to a redefinition of their contractual relationships. This shift can have significant implications for the contractual boundaries, as the assignee may assume new rights and obligations that were previously held by the assignor. In particular, fiduciary obligations, such as duties of care and loyalty, may be transferred to the assignee, creating new responsibilities and liabilities.

The redefinition of contractual relationships can also lead to changes in the allocation of risk and liability among the parties. The assignee may assume new risks and liabilities, while the assignor may be released from certain obligations. This can have significant consequences for the parties' contractual expectations and may require adjustments to their contractual strategies. Furthermore, the assignment of a contract can also impact the contractual relationships between the parties and third parties, such as subcontractors or suppliers. A thorough understanding of the legal implications of contract assignments is essential to navigate these complex issues and ensure that the parties' rights and duties are properly allocated.

Dispute Resolution and Litigation

In the event of a contractual dispute arising from an assignment, parties may seek resolution through various means, including arbitration, mediation, or litigation . The chosen method of dispute resolution will substantially impact the outcome of the case.

In cases where litigation is pursued, court jurisdiction becomes a vital factor. The courts will need to determine whether they have jurisdiction over the matter, taking into account the assignment agreement and the parties involved.

Some assignment agreements may include arbitration clauses, which can affect the dispute resolution process. These clauses can dictate the forum for dispute resolution, the rules of procedure, and the powers of the arbitrator.

• The terms of the assignment agreement can influence the choice of dispute resolution method
• The jurisdiction of the court may be determined by the terms of the assignment agreement
• Arbitration clauses can limit the scope of judicial review
• The parties' rights and obligations under the assignment agreement can impact the dispute resolution process

Avoiding Unintended Consequences

Contractual disputes and litigation can be costly and time-consuming, making it imperative for parties to carefully consider the terms of an assignment agreement to avoid unintended consequences that may arise from misunderstandings or ambiguities. To mitigate these risks, a thorough examination is crucial to identify potential pitfalls and zones of uncertainty. This involves a detailed review of the contract, concentrating on key provisions such as assignment clauses, warranties, and indemnities. A meticulous contract review can help parties understand their rights and obligations, verifying that the assignment agreement accurately reflects their intentions. In addition, a well-drafted agreement can prevent disputes by providing clear and unambiguous terms, thereby reducing the likelihood of litigation. By conducting a thorough examination and contract review, parties can avoid unintended consequences and guarantee a smooth transfer of rights and obligations. This proactive approach can save time, resources, and reputational damage, ultimately facilitating a successful contract assignment.

Frequently Asked Questions

Can contractual rights be assigned to multiple parties simultaneously?.

Contractual rights can be assigned to multiple parties simultaneously, creating joint ownership or conferring benefits on multiple beneficiaries, but this may lead to complexities in rights management, benefit distribution, and potential disputes among assignees.

Do Contractual Obligations Transfer Automatically Upon Assignment?

Upon assignment, contractual obligations do not automatically transfer; instead, novation requirements must be fulfilled, and successor liability may apply, thereby guaranteeing the assignee assumes the obligations and the assignor is released from liability.

Is an Assignment Agreement a Separate Contract From the Original?

An assignment agreement constitutes a separate contract from the original, establishing a new contractual relationship between assignor and assignee, thereby creating a contract hierarchy, where the assignment agreement legally merges with the original contract.

Can a Contractual Party Assign Their Rights Without the Other Party's Knowledge?

In general, a contractual party can assign their rights without the other party's knowledge if the original contract remains silent on the matter, implying silent consent, allowing for unilateral decisions regarding assignment.

Does an Assignment Void the Original Contract Between the Parties?

An assignment does not automatically void the original contract between parties, but it may trigger novation requirements or contract termination clauses, depending on the specific terms and conditions outlined in the agreement.

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Chapter 12 – Third-Party Rights

12.2 Assignment of Contract Rights

Contracts create rights and obligations between contracting parties. An assignment is the transfer of rights under a contract from one party (the assignor ) to another party (the assignee ). When a party assigns their rights under a contract, they are essentially transferring their ability to receive benefits or enforce terms of the contract to someone else. Stated another way, an assignment occurs when an   obligee   (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the   obligor   (the one who has a duty to perform) to a third person ( assignee ); the obligee then becomes an   assignor   (one who makes an assignment). So, the party that makes the assignment is both an obligee and an assignor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor.

Generally, the assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are a common occurrence in business, legal, and financial transactions.

Figure 12 .1   Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment , the assignor must make known his intention to transfer the rights to the third person. This intention must take place in the present – it cannot be a future intention. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for no exchange of money or any other consideration. For example, Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, and need not be written.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment. Thus, if Mrs. Franklin assigns the $750 a month from the sale of her house to her son Jason as a gift, this assignment is valid, but revocable.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged from their obligation within the contract. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice. Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

An assignment of rights effectively makes the assignee “ stand in the shoes” of   the assignor (the “shoe rule”). He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment. Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course. Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor.     While a waiver  of defenses   makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such   consumer transactions . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

Prohibited Assignments

The general rule—as previously noted—is that most contract rights are assignable, and the law favors freely assignable rights. There are five exceptions to this rule however.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment. But, some changes are significant enough to bar assignments.

Several residents in the town of Centerville sign up on an annual basis with the Centerville   Times   to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. But if the change involves assigning the right to receive the paper to someone that is outside of the delivery route, that change would be material, and the assignment could be invalid.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a   personal right   that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. It is for this same reason that tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person is that is living in the landlord’s property.

Nassau Hotel Co. v. Barnett & Barse Corporation , 147 N.Y.S. 283 (1914)

MCLAUGHLIN, J.

Plaintiff owns a hotel at Long Beach, L. I., and on the 21st of November, 1912, it entered into a written agreement with the individual defendants Barnett and Barse to conduct the same for a period of years.…Shortly after this agreement was signed, Barnett and Barse organized the Barnett & Barse Corporation with a capital stock of $10,000, and then assigned the agreement to it. Immediately following the assignment, the corporation went into possession and assumed to carry out its terms. The plaintiff thereupon brought this action to cancel the agreement and to recover possession of the hotel and furniture therein, on the ground that the agreement was not assignable. [Summary judgment in favor of the plaintiff, defendant corporation appeals.]

The only question presented is whether the agreement was assignable. It provided, according to the allegations of the complaint, that the plaintiff leased the property to Barnett and Barse with all its equipment and furniture for a period of three years, with a privilege of five successive renewals of three years each. It expressly provided:

‘That said lessees…become responsible for the operation of the said hotel and for the upkeep and maintenance thereof and of all its furniture and equipment in accordance with the terms of this agreement and the said lessees shall have the exclusive possession, control and management thereof. * * * The said lessees hereby covenant and agree that they will operate the said hotel at all times in a first-class business-like manner, keep the same open for at least six (6) months of each year, * * *’ and ‘in lieu of rental the lessor and lessees hereby covenant and agree that the gross receipts of such operation shall be, as received, divided between the parties hereto as follows: (a) Nineteen per cent. (19%) to the lessor. * * * In the event of the failure of the lessees well and truly to perform the covenants and agreements herein contained,’ they should be liable in the sum of $50,000 as liquidated damages. That ‘in consideration and upon condition that the said lessees shall well and faithfully perform all the covenants and agreements by them to be performed without evasion or delay the said lessor for itself and its successors, covenants and agrees that the said lessees, their legal representatives and assigns may at all times during said term and the renewals thereof peaceably have and enjoy the said demised premises.’ And that ‘this agreement shall inure to the benefit of and bind the respective parties hereto, their personal representatives, successors and assigns.’

The complaint further alleges that the agreement was entered into by plaintiff in reliance upon the financial responsibility of Barnett and Barse, their personal character, and especially the experience of Barnett in conducting hotels; that, though he at first held a controlling interest in the Barnett & Barse Corporation, he has since sold all his stock to the defendant Barse, and has no interest in the corporation and no longer devotes any time or attention to the management or operation of the hotel.

…[C]learly…the agreement in question was personal to Barnett and Barse and could not be assigned by them without the plaintiff’s consent. By its terms the plaintiff not only entrusted them with the care and management of the hotel and its furnishings—valued, according to the allegations of the complaint, at more than $1,000,000—but agreed to accept as rental or compensation a percentage of the gross receipts. Obviously, the receipts depended to a large extent upon the management, and the care of the property upon the personal character and responsibility of the persons in possession. When the whole agreement is read, it is apparent that the plaintiff relied, in making it, upon the personal covenants of Barnett and Barse. They were financially responsible. As already said, Barnett had had a long and successful experience in managing hotels, which was undoubtedly an inducing cause for plaintiff’s making the agreement in question and for personally obligating them to carry out its terms.

It is suggested that because there is a clause in the agreement to the effect that it should ‘inure to the benefit of and bind the respective parties hereto, their personal representatives and assigns,’ that Barnett and Barse had a right to assign it to the corporation. But the intention of the parties is to be gathered, not from one clause, but from the entire instrument [Citation] and when it is thus read it clearly appears that Barnett and Barse were to personally carry out the terms of the agreement and did not have a right to assign it. This follows from the language used, which shows that a personal trust or confidence was reposed by the plaintiff in Barnett and Barse when the agreement was made.

In [Citation] it was said: “Rights arising out of contract cannot be transferred if they…involve a relation of personal confidence such that the party whose agreement conferred those rights must have intended them to be exercised only by him in whom he actually confided.”

This rule was applied in [Citation] the court holding that the plaintiff—the assignee—was not only technically, but substantially, a different entity from its predecessor, and that the defendant was not obliged to entrust its money collected on the sale of the presses to the responsibility of an entirely different corporation from that with which it had contracted, and that the contract could not be assigned to the plaintiff without the assent of the other party to it.

The reason which underlies the basis of the rule is that a party has the right to the benefit contemplated from the character, credit, and substance of him with whom he contracts, and in such case he is not bound to recognize…an assignment of the contract.

The order appealed from, therefore, is affirmed.

Case questions

• The corporation created to operate the hotel was apparently owned and operated by the same two men the plaintiff leased the hotel to in the first place. What objection would the plaintiff have to the corporate entity—actually, of course, a legal fiction—owning and operating the hotel?
• The defendants pointed to the clause about the contract inuring to the benefit of the parties “and assigns.” So the defendants assigned the contract. How could that not be allowed by the contract’s own terms?
• What is the controlling rule of law upon which the outcome here depends?

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignments. For example, the assignment of future wages is regulated by state and federal law, such an attempt to try to effect such an assignment would not be valid. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

A written contract may contain general language that prohibits assignment of rights or assignment of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.”     In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties. Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title. Bottom line, even though a contract may expressly state it cannot be assigned, that may not always be the case.

As we saw with integration clauses, if you are a Verizon Wireless ™ customer, you have agreed to their terms regarding assignment:

You cannot assign this Agreement or any of your rights or duties under it without our permission. However, we may assign this Agreement or any debt you owe us without notifying you.

Such assignment clauses can be found in many common contracts.

Rose v. Vulcan Materials Co. 194 S.E.2d 521 (N.C. 1973)

HUSKINS, J.

…Plaintiff [Rose], after leasing his quarry to J. E. Dooley and Son, Inc., promised not to engage in the rock-crushing business within an eight-mile radius of [the city of] Elkin for a period of ten years. In return for this promise, J. E. Dooley and Son, Inc., promised, among other things, to furnish plaintiff stone f.o.b. the quarry site at Cycle, North Carolina, at stipulated prices for ten years.…

By a contract effective 23 April 1960, Vulcan Materials Company, a corporation…, purchased the stone quarry operations and the assets and obligations of J. E. Dooley and Son, Inc.…[Vulcan sent Rose a letter, part of which read:]

Mr. Dooley brought to us this morning the contracts between you and his companies, copies of which are attached. This is to advise that Vulcan Materials Company assumes all phases of these contracts and intends to carry out the conditions of these contracts as they are stated.

In early 1961 Vulcan notified plaintiff that it would no longer sell stone to him at the prices set out in [the agreement between Rose and Dooley] and would thereafter charge plaintiff the same prices charged all of its other customers for stone. Commencing 11 May 1961, Vulcan raised stone prices to the plaintiff to a level in excess of the prices specified in [the Rose-Dooley agreement].

At the time Vulcan increased the prices of stone to amounts in excess of those specified in [the Rose-Dooley contract], plaintiff was engaged in his ready-mix cement business, using large quantities of stone, and had no other practical source of supply. Advising Vulcan that he intended to sue for breach of contract, he continued to purchase stone from Vulcan under protest.…

The total of these amounts over and above the prices specified in [the Rose-Dooley contract] is $25,231.57, [about $260,000 in 2024 dollars] and plaintiff seeks to recover said amount in this action.

The [Rose-Dooley] agreement was an executory bilateral contract under which plaintiff’s promise not to compete for ten years gained him a ten-year option to buy stone at specified prices. In most states, the assignee of an executory bilateral contract is not liable to anyone for the nonperformance of the assignor’s duties thereunder unless he expressly promises his assignor or the other contracting party to perform, or ‘assume,’ such duties.…These states refuse to imply a promise to perform the duties, but if the assignee expressly promises his assignor to perform, he is liable to the other contracting party on a third-party beneficiary theory. And, if the assignee makes such a promise directly to the other contracting party upon a consideration, of course he is liable to him thereon. [Citation]

A minority of states holds that the assignee of an executory bilateral contract under a general assignment becomes not only assignee of the rights of the assignor but also delegatee of his duties; and that, absent a showing of contrary intent, the assignee impliedly promises the assignor that he will perform the duties so delegated. This rule is expressed in Restatement, Contracts, s 164 (1932) as follows:

(1) Where a party under a bilateral contract which is at the time wholly or partially executory on both sides purports to assign the whole contract, his action is interpreted, in the absence of circumstances showing a contrary intention, as an assignment of the assignor’s rights under the contract and a delegation of the performance of the assignor’s duties.

(2) Acceptance by the assignee of such an assignment is interpreted, in the absence of circumstances showing a contrary intention, as both an assent to become an assignee of the assignor’s rights and as a promise to the assignor to assume the performance of the assignor’s duties.’ (emphasis added)

We…adopt the Restatement rule and expressly hold that the assignee under a general assignment of an executory bilateral contract, in the absence of circumstances showing a contrary intention, becomes the delegatee of his assignor’s duties and impliedly promises his assignor that he will perform such duties.

The rule we adopt and reaffirm here is regarded as the more reasonable view by legal scholars and textwriters. Professor Grismore says:

It is submitted that the acceptance of an assignment in this form does presumptively import a tacit promise on the part of the assignee to assume the burdens of the contract, and that this presumption should prevail in the absence of the clear showing of a contrary intention. The presumption seems reasonable in view of the evident expectation of the parties. The assignment on its face indicates an intent to do more than simply to transfer the benefits assured by the contract. It purports to transfer the contract as a whole, and since the contract is made up of both benefits and burdens both must be intended to be included.…Grismore, Is the Assignee of a Contract Liable for the Nonperformance of Delegated Duties? 18 Mich.L.Rev. 284 (1920).

In addition, with respect to transactions governed by the Uniform Commercial Code, an assignment of a contract in general terms is a delegation of performance of the duties of the assignor, and its acceptance by the assignee constitutes a promise by him to perform those duties. Our holding in this case maintains a desirable uniformity in the field of contract liability.

We further hold that the other party to the original contract may sue the assignee as a third-party beneficiary of his promise of performance which he impliedly makes to his assignor, under the rule above laid down, by accepting the general assignment.  Younce v. Lumber Co. , [Citation] (1908), holds that where the assignee makes an express promise of performance to his assignor, the other contracting party may sue him for breach thereof. We see no reason why the same result should not obtain where the assignee breaches his promise of performance implied under the rule of Restatement s 164. ‘That the assignee is liable at the suit of the third party where he expressly assumes and promises to perform delegated duties has already been decided in a few cases (citing Younce). If an express promise will support such an action it is difficult to see why a tacit promise should not have the same effect.’ Grismore, supra. Parenthetically, we note that such is the rule under the Uniform Commercial Code, [2-210].

We now apply the foregoing principles to the case at hand. The contract of 23 April 1960, between defendant and J. E. Dooley and Son, Inc., under which, as stipulated by the parties, ‘the defendant purchased the assets and obligations of J. E. Dooley and Son, Inc.,’ was a general assignment of all the assets and obligations of J. E. Dooley and Son, Inc., including those under [the Rose-Dooley contract]. When defendant accepted such assignment it thereby became delegatee of its assignor’s duties under it and impliedly promised to perform such duties.

When defendant later failed to perform such duties by refusing to continue sales of stone to plaintiff at the prices specified in [the Rose-Dooley contract], it breached its implied promise of performance and plaintiff was entitled to bring suit thereon as a third-party beneficiary.

The decision…is reversed with directions that the case be certified to the Superior Court of Forsyth County for reinstatement of the judgment of the trial court in accordance with this opinion.

• Why did Rose need the crushed rock from the quarry he originally leased to Dooley?
• What argument did Vulcan make as to why it should not be liable to sell crushed rock to Rose at the price set out in the Rose-Dooley contract?
• What rule did the court here announce in deciding that Vulcan was required to sell rock at the price set out in the Rose-Dooley contract? That is, what is the controlling rule of law in this case?

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice. With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 the first assignee to file will prevail.

Figure 1 2 .2   Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s  warranties   to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

Video on Assignment

Check your Understanding

the transfer of rights under a contract from one party to another party

the party who transfers their rights to another

a person to whom a property right is transferred

one to whom an obligation is made

one who makes and has an obligation

a legal relationship, created by law or contract, in which a person or business owes something to another

relevant and significant

Business Law I - Interactive Copyright © 2024 by Melanie Morris is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Contracts: assignment

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• Increase efficiency
• Enhance productivity
• Improve response time
• General Contract and Boilerplate
• Substantive Law
• 1 Scope of this note
• 2 What is an assignment?
• 3 Effect of assignment
• 4 When is assignment used?
• 5 Types of assignment
• 6 Assignment formalities
• Personal contracts
• Assignments prohibited by public policy
• Construing non-assignment provisions
• Requirements for consent
• Circumventing restrictions on assignment
• Legal restrictions on non-assignment provisions
• "Conditional benefit" exception discredited for assigning contractual obligations
• Creating a legal assignment
• When are legal assignments used?
• Who must consent?
• Must a legal assignment be in writing?
• Who must sign the assignment?
• Is consideration required?
• Notice of assignment
• Notice must be in writing
• Must the notice take any particular form?
• Does the notice need to state the date of the assignment?
• When should notice be given?
• Who can give notice?
• To whom can notice be given?
• Can notice be given in advance of assignment?
• Can the other contracting party demand sight of the assignment agreement?
• Which methods of giving notice are valid?
• Effect of non-assignment provision on a notice of assignment
• What happens if notice of assignment is not given to the other contracting party?
• Creating an equitable assignment
• When are equitable assignments used?
• Must an equitable assignment be in writing?
• Is notice of assignment required?
• Subject to equities
• Recovery of loss by assignee
• 14 Assignment of a third party right
• Conditional fee agreements
• Construction agreements
• Consumer contracts
• Security arrangements
• General reading
• Assignment of other choses in action
• 17 Drafting assignment provisions
• 18 Section 136 of the Law of Property Act 1925

Primary tabs

Assign is the act of transferring rights , property , or other benefits to another party (the assignee ) from the party who holds such benefits under contract (the assignor). This concept is used in both  contract  and property law . 

Contract Law  

Under contract law, when one party assigns a  contract , the assignment represents both: (1) an assignment of rights; and (2) a delegation of  duties . 

• For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C. 
• Here, A has both: (1) assigned A’s rights under the contract to the $50; and (2) delegated A’s  duty  to teach guitar, to C. 
• In this example, A is both the “assignor” and the “delegee” who delegates  the duties to another (C), C is known as the “ obligor ” who must perform the  obligations  to the  assignee , and B is the assignee who is owed duties and is liable to the obligor.

Assigning of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law. 

First, if an individual has not yet secured the contract to perform duties to another, they cannot assign their future right to an assignee. 

• That is, if A has not yet contracted with B to teach B guitar, A cannot assign their rights to C. 

Second, rights cannot be assigned when they  materially change the obligor’s duty and rights. 

Third, the obligor can sue the assignee directly if the assignee does not pay them. 

• Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor. It can only be delegated if the promised  performance  is more commonplace. Further, an obligee can sue if the  assignee  does not perform.  However, the delegee is  secondarily liable  unless there has been an  express   release  of the delegee. 

• Meaning if B does want C to teach guitar but C refuses to, then B can sue C. If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is  novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. Novation requires an original obligee’s  consent . 

Property Law

Under  property law , assignment typically arises in landlord-tenant situations.

• For example, A might be renting from landlord B but wants another party (C) to take over the property. 
• In this scenario, A might choose between  assigning  and  subleasing  the property to C. 
• If  assigning , A would give C the entire balance of the term , with no reversion to anyone; whereas if  subleasing , A would give C the property for a limited period of the remaining term.
• Under assignment, C would have  privity  of  estate  with the landlord while under a sublease, C would not. 

[Last updated in June of 2022 by the Wex Definitions Team ]

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Legal assignment

Practical law uk glossary 9-107-6754  (approx. 3 pages).

• Only the benefit of an agreement may be assigned.
• The assignment must be absolute.
• The rights to be assigned must be wholly ascertainable and must not relate to part only of a debt.
• The assignment must be in writing and signed under hand by the assignor.
• Notice of the assignment must be received by the other party or parties for the assignment to take effect.
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Deed of Assignment and the Notice of Assignment -What is the Difference?

In this article, Richard Gray barrister takes a brief look at the differences between a Deed of Assignment and a Notice of Assignment and the effect of the assignment on the contracting party

At the end of 2020, Elysium Law were instructed to act for a significant number of clients in relation to claims made by a company known as Felicitas Solutions Ltd (an Isle of Man Company) for recovery of loans which had been assigned out of various trust companies following loan planning entered into by various employees/contractors.

Following our detailed response, as to which please see the article on our website written by my colleague Ruby Keeler-Williams , the threatened litigation by way of debt claims seem to disappear. It is important to note that the original loans had been assigned by various Trustees to Felicitas, by reason of which, Felicitas stood in the shoes of the original creditor, which allowed the threatened action to be pursued.

After a period of inertia, Our Clients, as well as others, have been served with demand letters by a new assignee known as West 28 th Street Ltd . Accompanying the demand letters is a Notice of Assignment, by reason of which the Assignee has informed the alleged debtor of the Assignees right to enforce the debt.

Following two conferences we held last week and a number of phone call enquiries which we have received, we have been asked to comment upon the purport and effect of the Notice of Assignment, which the alleged debtors have received. Questions such as what does this mean (relating to the content) but more importantly is the ‘Notice’ valid?

Here I want to look briefly at the differences between the two documents.

There is no need for payment to make the assignment valid and therefore it is normally created by Deed.

 The creation of a legal assignment is governed by Section 136 of the Law of Property Act 1925:

136 Legal assignments of things in action.

(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a) the legal right to such debt or thing in action;

(b) all legal and other remedies for the same; and

(c) the power to give a good discharge for the same without the concurrence of the assignor:

Some of the basic requirements for a legal assignment are;

• The assignment must not be subject to conditions.
• The rights to be assigned must not relate to only part of a debt, or other legal chose in action.
• The assignment must be in writing and signed by the assignor.
• The other party or parties to the agreement must be given notice of the assignment.

Notice of assignment

To create a legal assignment, section 136 requires that express notice in writing of the assignment must be given to the other contracting party (the debtor).

Notice must be in writing

Section 136 of the LPA 1925 requires “express notice in writing” to be given to the other original contracting party (or parties).

 Must the notice take any particular form?

The short answer is no. Other than the requirement that it is in writing, there is no prescribed form for the notice of assignment or its contents. However, common sense suggests that the notice must clearly identify the agreement concerned.

Can we  challenge the Notice?

No. You can challenge the validity of the assignment assignment by ‘attacking the Deed, which must conform with Section 136. In this specific case, the Notice sent by West 28 th Street in itself is valid. Clearly, any claims made must be effected by a compliant Deed and it is that which will require detailed consideration before any right to claim under the alleged debt is considered.

Can I demand sight of the assignment agreement

On receiving a notice of assignment, you may seek to satisfy yourself that the assignment has in fact taken place. The Court of Appeal has confirmed that this is a valid concern, but that does not give an automatic right to require sight of the assignment agreement.

In Van Lynn Developments Limited v Pelias Construction Co [1969]1QB 607  Lord  Denning said:

“After receiving the notice, the debtor will be entitled, of course, to require a sight of the assignment so as to be satisfied that it is valid…”

The Court of Appeal subsequently confirmed this  stating the contracting party is entitled to satisfy itself that a valid absolute assignment has taken place, so that it can be confident the assignee can give it a good discharge of its obligations

The important document is the Deed of Assignment, which sets out the rights assigned by the Assignor. The Notice of Assignment is simply a communication that there has been an assignment. The deed is governed by Section 136 of the LP 1925. It should be possible to obtain a copy of the Deed prior to any action taken in respect of it.

For more information on the claims by West 28 th Street or if advice is needed on the drafting of a Deed, then please call us on 0151-328-1968 or visit www.elysium-law.com .

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Assignments: why you need to serve a notice of assignment

Catherine phillips.

PSL Principal Associate

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the potential change in his contractual position is brought about by a person who is entitled, and whom he can see to be entitled, to bring about that change".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

• If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
• If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
• Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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A Guide to Understanding Anti-Assignment Clauses

Introduction

With the increasing trend of globalization in the business world, Israeli companies and investors are commonly entering into agreements with U.S.-based entities. One of the most frequently found clauses in U.S. commercial agreements is an anti-assignment provision that prevents either or both of the parties from assigning the agreement to a third party prior to receiving the consent of the non-assigning party. Many transactions will also require the due diligence review of a large number of U.S. commercial agreements that the target has entered into. The following post will provide an overview and general guidance on the proper analysis of anti-assignment clauses.

Silent Provision and Change of Control Provision

In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non-assigning party. See  Peterson v. District of Columbia Lottery and Charitable Games Control Board , 673 A.2d 664 (D.C. 1996) (“The right to assign is presumed, based upon principles of unhampered transferability of property rights and of business convenience.”) Exceptions include where the assignment affects the duties of the other party to the contract, where the contract is considered to be a personal contract and when the assignment violates public policy (i.e. tort liability).

On the other hand, many contracts contain provisions that not only prevent the assignment of the contract, but also state that a change of control of the target is deemed an assignment or the contract contains a separate clause requiring consent in the event of a change of control. This type of provision will often be triggered in transactions in which a buyer is acquiring the target company. A careful review of change of control clauses is thus especially imperative and often very fact specific to the deal at hand.

Deal Structures

One of the commonly used anti-assignment provisions reads as follows: “No party may assign any of its rights under this Agreement, by operation of law or otherwise, to a third party without the prior written consent of the non-assigning party.” In the situation where the target has entered into agreements that contain this clause, whether or not an assignment is considered to have taken place in the event of the acquisition of the target will largely depend on the specific deal structure of the transaction.

The commonly used deal structures are an asset acquisition, a stock acquisition and a merger.

• Asset Acquisition : In an asset acquisition the buyer only acquires those assets and liabilities of a target that are specifically listed in the Asset Purchase Agreement. Any agreement that has an anti-assignment clause will be triggered in the event of an asset acquisition. Indeed, one of the disadvantages of structuring a corporate acquisition as an asset acquisition is that contracts that will be transferred must be assigned
• Stock Acquisition : In a stock acquisition, a buyer acquires a target’s stock directly from the selling shareholders. After the closing of the Stock Purchase Agreement, the target will continue as it existed prior to the acquisition with respect to its ownership of asset and liabilities. Thus, in essence, the anti-assignment clause was never triggered in the first place. See  Baxter Pharm. v. ESI Lederle , 1999 WL 160148 (Del. Ch. 1999).
• A direct merger occurs when the target merges with and into the buyer, and the buyer continues as the surviving entity. In a similar fashion to an asset acquisition, this type of merger will trigger the anti-assignment clause
• A forward triangular merger occurs when the target merges with and into the buyer’s merger subsidiary, with the merger subsidiary surviving the merger. This type of merger will trigger the anti-assignment clause. See  Tenneco Automotive Inc. v. El Paso Corporation , 2002 WL 45930 (Del. Ch. 2002) and  Star Cellular Telephone Company, Inc. v. Baton Rouge CGSA, Inc., 19 Del.  J.  Corp. L. 875  (Del. Ch. 1993).
• A reverse triangular merger occurs when the buyer’s subsidiary merges with and into the target, with the target surviving as a wholly owned subsidiary of the buyer. In effect, the target continues to exist after the closing. The Delaware Chancery Court in  Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH,  2013 WL 655021 (Del. Ch. Feb. 22, 2013) held that the acquisition of a target in a reverse triangular merger did not violate an existing agreement of the target that prohibited assignments by operation of law. The court noted that generally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger. Thus there is a significant difference between a reverse triangular merger and both a direct merger and forward triangular merger, as in those cases the target was not the surviving company of the merger. Note, however, that the matter is not uniformly resolved. In  SQL Solutions, Inc. v. Oracle Corp.  (N.D. Cal. 1991), a United States District Court in the Northern District of California applied California law and federal IP principles to hold that a reverse triangular merger constitutes an assignment by operation of law.

Additional Considerations

Damages and Termination : Some courts have held that a contractual provision prohibiting assignment operates only to limit the parties’ right to assign the contract (for which the remedy would be damages for breach of a covenant not to assign) but the provision does not limit the power to actually assign the contract (which would invalidate the assignment), unless the contract explicitly states that a non-conforming assignment shall be “void” or “invalid.” See, e.g.,  Bel-Ray Co v. Chemrite (Pty.) Ltd ., 181 F. 3d 435 (3d Cir. 1999).  It is also imperative to review the termination section of an agreement, as certain agreements contain a provision by which the non-assigning party has the right to terminate the agreement in the event of an assignment.

As described above, any review of U.S. commercial agreements is highly dependent on the structure of the deal and at times, the specific jurisdiction governing the agreement. With offices across the United States, and specifically in Delaware, New York, and California, all states with highly sophisticated and oft-invoked commercial laws, Greenberg Traurig is uniquely situated in a position to offer high value legal services to Israeli clients.

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